The reasons for this are fairly good, and fairly straightforward, in the standard case for free trade.
Under the standard theory, the main basis for the benefits of free trade is comparative advantage. If Australia is relatively more efficient in producing iron ore (that is, if it has a comparative advantage in iron ore), and China is more efficient at producing manufactured goods, then at the country level both Australia and China are better off if Australia specialises in iron ore, China specialises in manufactured goods, and the two countries trade with each other. Then both countries are able to obtain more consumption of each good than they would alone, given whatever initial resources they have. This is an economic benefit, understood since David Ricardo wrote about it in 1817.
If one thinks of the economic units in terms of countries, free trade between China and Australia is Pareto improving. Both countries are made better off, and no one (in this limited model) is made worse off. This is the Holy Grail of economic policy. The optimal level of tariffs is thus zero, as restrictions on free trade harm both countries.
But if one thinks instead at the level of individuals within a country, then free trade is no longer Pareto improving relative to tariffs. In the example above, if I'm a worker in an Australian manufacturing firm which was previously protected by tariffs, and these get eliminated, then I really do get screwed. It's not just complaining - as my firm goes broke, I lose my job, and the previous skills I have are no longer economically useful in my country. Even if I get another job, I likely will have a lower future wage for quite a while, if not permanently.
The steel workers in Ohio complaining about free trade aren't just making it up. Things really did get a lot crappier when tariffs were eliminated.
But economics has an answer here. Free trade isn't Pareto improving, but it is Kaldor Hicks improving. In other words, the total gains to the economy are sufficiently large that the beneficiaries could organise a transfer payment to those who lost their jobs which would made the Ohio steel workers also better off.
As a matter of political economy, this transfer doesn't actually happen. You'd have to pay the losers from free trade a very large sum of money if they have to transition to years of unemployment, or a permanently lower future income.
Of course, this isn't really a problem of economics, more just politics. Is it the economist's fault that his prescriptions don't get followed?
So much for the standard theory. It's actually pretty good, as far as it goes. Like good economic proofs, it flows from assumptions to conclusions. If it's wrong, it's because there's something in the model that's being left out, or one of the assumptions is questionable.
There are a number of possible extensions one can make, like depreciating human capital. But to me, it's the base assumptions that are the most interesting. What are they?
We have the following:
1. Consumption is a good. You're better off consuming more goods and services than fewer goods and services, all else equal.
2a. Leisure is a good, or equivalently
2b. Work is a bad.
In other words, for any given level of consumption, you'd rather work less than work more.
These are not terrible assumptions. #1 seems probably true. You may hit a point of satiation with consumption, but over most ranges of wealth that people operate on, having more stuff beats having less stuff, unless the stuff poses other costs (like screwing up your children, in which case all else isn't equal).
But what about #2?
Going from a 14 hour work day to a 10 hour work day, with the same wages and consumption, is surely an improvement in welfare.
Going from a 10 hour work day to a 6 hour work day, with the same wages and consumption, is also almost surely an improvement in welfare.
But the big question is the following: is it still an improvement in welfare to go from a 6 hour work day, to a zero hour work day in perpetuity?
In other words, if your consumption stayed exactly the same, would you prefer to have some sort of job, or no job, ever?
You may think work sucks, but be careful what you wish for.
What if it turns out that people actually need some sense of purpose, some reason to get up in the morning?
Admittedly, having a job isn't always a fun purpose. But it's a structure, and a discipline, and a set of people you can interact with, and a routine that, if it works well, results in the satisfaction of providing for yourself.
What would life look like if you had basic consumption needs provided for you, no strings attached, without any need to work?
Well, as it turns out, we have many decades of data on that question. They're on display in a housing estate or ghetto near you. And the results ain't pretty. Ask Theodore Dalrymple, who wrote about this extensively:
Every few months, doctors from countries like the Philippines and India arrive fresh from the airport to work for a year's stint at my hospital. It is fascinating to observe their evolving response to British squalor.
At the start, they are uniformly enthusiastic about the care that we unsparingly and unhesitatingly give to everyone, regardless of economic status. For a couple of weeks, they think this all represents the acme of civilization, especially when they recall the horrors at home. Poverty—as they know it— has been abolished.
Before very long, though, they start to feel a vague unease. A Filipina doctor, for example, asked me why so few people seemed grateful for what was done for them. What prompted her question was an addict who, having collapsed from an accidental overdose of heroin, was brought to our hospital. He required intensive care to revive him, with doctors and nurses tending him all night. His first words to the doctor when he suddenly regained consciousness were, "Get me a fucking roll-up" (a hand-rolled cigarette). His imperious rudeness didn't arise from mere confusion: he continued to treat the staff as if they had kidnapped him and held him in the hospital against his will to perform experiments upon him. "Get me the fuck out of here!"
My doctors from Bombay, Madras, or Manila observe this kind of conduct open- mouthed. At first they assume that the cases they see are a statistical quirk, a kind of sampling error, and that given time they will encounter a better, more representative cross section of the population. Gradually, however, it dawns upon them that what they have seen is representative. When every benefit received is a right, there is no place for good manners, let alone for gratitude.
By the end of three months my doctors have, without exception, reversed their original opinion that the welfare state, as exemplified by England, represents the acme of civilization. On the contrary, they see it now as creating a miasma of subsidized apathy that blights the lives of its supposed beneficiaries. They come to realize that a system of welfare that makes no moral judgments in allocating economic rewards promotes antisocial egotism. The spiritual impoverishment of the population seems to them worse than anything they have ever known in their own countries. And what they see is all the worse, of course, because it should be so much better. The wealth that enables everyone effortlessly to have enough food should be liberating, not imprisoning. Instead, it has created a large caste of people for whom life is, in effect, a limbo in which they have nothing to hope for and nothing to fear, nothing to gain and nothing to lose. It is a life emptied of meaning.
"On the whole," said one Filipino doctor to me, "life is preferable in the slums of Manila." He said it without any illusions as to the quality of life in Manila.
I skipped the most striking descriptions of the problem, because if I started, I'd end up quoting the whole thing. Read it all, if you haven't before.
A question, dear reader.
Do you think the problems of the people described above stem from a lack of consumption? They don't have to do any work, so in a standard model, the only problem left is that they must be consuming too little.
Suppose that Dalrymple is describing his subjects in the above article honestly, and you have two policy choices to consider for the above recipients.
Option A - Increase their welfare payments by 50%
Option B - Find them a not unpleasant job for 6 hours per day, and require them to do honest work in order to receive the same welfare payments as before.
Which of these two policies would result in a larger improvement in human welfare for such people?
In the standard model, the answer is obvious. Given our assumptions, Option A is far preferable. Do you believe that?
Would it change your mind to find out that lower class whites in America (especially in rust belt parts of the US that have been worst hit by job losses from free trade) in recent decades have been so despondent that their life expectancy has actually been dropping as they kill themselves with alcohol, opiates, and suicide?
The standard answer to this is that we have an opiate problem. And a drinking problem. These are "substance abuse" issues. But why now? Alcohol was always there. Why is it only now that people decide there is no other purpose or hope in their lives, and start drinking themselves to death?
To turn these concerns back into the language of economics, the Holmes conjecture is that if leisure is not always a good, and work is not always a bad, then it is no longer obvious that the optimal level of tariffs is zero.
Sometimes, you might prefer to have some restrictions on trade in order to keep jobs in America.
But you have to be honest about why you're doing this.
Targeted tariffs won't raise consumption. They won't spur economic growth. They will lead to more expensive goods, and less consumption. David Ricardo was right on all that. Comparative advantage still exists, and be very wary of anyone who talks about free trade without acknowledging this.
But they might also lead to more employment. And this may well be worth it in terms of the quantity that the economist's social planner is meant to care about, namely total welfare.
It might lead to fewer rust belt whites killing themselves with opiates, because their communities are totally hollowed out with everybody sitting around on welfare without any purpose in their lives.
If steel products cost slightly more as a result, personally that doesn't strike me as the end of the world.
Of course, this is a cautionary note, not a case for tariffs-a-go-go. To say that the optimal level is not zero does not imply that the optimal levels is high, or across-the-board. And it's also not clear that tariffs versus free trade is the only solution to this, or even the best one.
I personally think that automation is a much bigger worry in this regard than free trade. I have similar questions about automation, which also doesn't strike me as everywhere and always welfare improving.
These aren't straightforward questions. If you ban the automobile, we get stuck with horses and carts forever.
And yet... and yet...
The Deaton and Case finding seems to me to be one of the most important findings in social science in recent years, and portends an enormous and growing problem. There are lots of workers who simply do not seem to be economically useful anymore, and in communities where lots of these people have ended up on welfare as a result of the endless grind towards replacement by robots, life is purposeless and miserable.
There are many other purposes that can be fostered - community, charity, art, religion, family.
But until we have a handle on how to solve the torrent of lives being sucked into the abyss of misery, as large as the AIDS epidemic, I remain open to a range of different policies in response.